Bank Reconciliations

BANK RECONCILIATIONS
Bank statement and cash book

• In theory, the entries appearing on a business's bank statement
should be exactly the same as those in the business cash book. The
balance shown by the bank statement should be the same as the cash
book balance on the same date.
• Why might your own estimate of your bank balance be different from
the amount shown on your bank statement? There are three common
explanations.
(a) Error. Errors in calculation, or recording income and payments, are more
likely to have been made by you than by the bank, but it is conceivable that
the bank has made a mistake too.
(b) Bank charges or bank interest. The bank might deduct charges for
interest on an overdraft or for its services, which you are not informed
about until you receive the bank statement.
.
(c) Timing differences
(i) There might be some cheques that you have received and paid into
the bank, but which have not yet been 'cleared' and added to your
account. So although your own records show that some cash has
been added to your account, it has not yet been acknowledged by
the bank – although it will be soon once the cheque has cleared.
(ii) Similarly, you might have made some payments by cheque, and
reduced the balance in your account in the record that you keep, but
the person who receives the cheque might not bank it for a while.
Even when it is banked, it takes a day or two for the banks to process
it and for the money to be deducted from your account.
What is a Bank Reconciliation
• If you keep a personal record of your cash position at the bank, and if
you check your periodic bank statements against what you think you
should have in your account, you will be doing a bank reconciliation.
• A bank reconciliation is a comparison of a bank statement (sent

monthly, weekly or even daily by the bank) with the cash book.
Differences between the balance on the bank statement and the
balance in the cash book will be errors or timing differences, and they
should be identified and satisfactorily explained.
What to look for when doing a bank reconciliation
• The cash book and bank statement will rarely agree at a given date. If you are
doing a bank reconciliation, you may have to look for the following items.
(a) Corrections and adjustments to the cash book
(i) Payments made into the bank account or from the bank account by way of
standing order or direct debit, which have not yet been entered in the cash book
(ii) Dividends received (on investments held by the business), paid direct into the
bank account but not yet entered in the cash book
(iii) Bank interest and bank charges, not yet entered in the cash book
(iv) Errors in the cash book that need to be corrected
The corrected cash book balance is the balance that is shown in the statement
of financial position.
(b) Items reconciling the corrected cash book balance to the bank statement
(i) Cheques drawn (ie paid) by the business and credited in the cash
book, which have not yet been presented to the bank, or 'cleared',
and so do not yet appear on the bank statement. These are
commonly known as unpresented cheques or outstanding cheque
(ii) Cheques received by the business, paid into the bank and debited
in the cash book, but which have not yet been cleared and entered
in the account by the bank, and so do not yet appear on the bank
statement. These are commonly known as outstanding lodgements
or deposits credited after date.
(iii) Electronic payments that have not yet been cleared.
Bank Reconciliation Formula
• PARTICULARS AMOUNT
Balance as per Bank Statement xxxx
Add Cheques deposited but not xxxx
Example: bank reconciliation
• At 30 September 20X6, the balance in the cash book of Wordsworth Co
was $805.15 debit. A bank statement on 30 September 20X6 showed
Wordsworth Co to be in credit by $1,112.30.
• On investigation of the difference between the two sums, it was
established that:
(a) The cash book had been undercast by $90.00 on the debit side*
(b) Cheques paid in not yet credited by the bank amounted to $208.20,
called outstanding lodgements
(c) Cheques drawn not yet presented to the bank amounted to $425.35
called unpresented cheques
Required
(a) Show the correction to the cash book.
(b) Prepare a statement reconciling the balance per bank statement to

the balance per cash book.
SOLUTION
QUESTION
• On 31 January 20X8 a company's cash book showed a credit balance
of $150 on its current account which did not agree with the bank
statement balance. In performing the reconciliation the following
points came to light.
• It was also discovered that the bank had debited the company's
account with a cheque for $400 in error.
• What was the original balance on the bank statement?

Practice Question
• On 30 June 20X0, Cook's cash book showed that he had an overdraft of $300 on his current
account at the bank. A bank statement as at the end of June 20X0 showed that Cook was in
credit with the bank by $65.
On checking the cash book with the bank statement you find the following.
(a) Cheques drawn, amounting to $500, had been entered in the cash book but had not been
presented.
(b) Cheques received, amounting to $400, had been entered in the cash book, but had not
been credited by the bank.
(c) On instructions from Cook the bank had transferred interest received on his deposit
account amounting to $60 to his current account, recording the transfer on 5 July 20X0.
However, this amount had been credited in the cash book as on 30 June 20X0.
(d) Bank charges of $35 shown in the bank statement had not been entered in the cash book.
(e) The payments side of the cash book had been undercast by $10.
(f) Dividends received amounting to $200 had been paid direct to the
bank and not entered in the cash book.
(g) A cheque for $50 drawn on deposit account had been shown in the
cash book as drawn on current account.
(h) A cheque issued to Jones for $25 was replaced when out of date. It
was entered again in the cash book, no other entry being made. Both
cheques were included in the total of unpresented cheques shown
above.
Required
(a) Indicate the appropriate adjustments in the cash book.
(b) Prepare a statement reconciling the corrected cash book balance with
that shown in the bank statement.
Solution
(a) The errors to correct are given in notes (c), (e), (f), (g) and (h) of the
question. Bank charges (note
(d)) also call for an adjustment.
• (Note that debit entries add to the cash balance and credit entries are
deductions from the cash balance.)
Cash Balance Adjustment
Cash Balance Adjustment Cont,,,
Notes
1 Item (c) is rather complicated. The transfer of interest from the
deposit to the current account was presumably given as an instruction
to the bank on or before 30 June 20X0.
• Since the correct entry is to debit the current account (and credit the
deposit account) the correction in the cash book should be to debit
the current account with 2 x$60 = $120, ie to cancel out the incorrect
credit entry in the cash book and then to make the correct debit
entry.
• However, the bank does not record the transfer until 5 July, and so it
will not appear in the bank statement.
Notes Cont,,,,
Item (h). Two cheques have been paid to Jones, but one is now
cancelled.
Since the cash book is credited whenever a cheque is paid, it should be
debited whenever a cheque is cancelled. The amount of cheques paid
but not yet presented should be reduced by the amount of the
cancelled cheque.
(b) BANK RECONCILIATION STATEMENT AT 30 JUNE 20X0
END

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BANK RECONCILIATIONS

Bank statement and cash book

• A bank reconciliation is a comparison of a bank statement (sent

(b) Prepare a statement reconciling the balance per bank statement to

• What was the original balance on the bank statement?

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